New York City remains one of the world's dominant financial centres, on any metric.
Its stock exchange is by far the largest in the world in terms of market capitalisation.
The US corporate debt market similarly eclipses that of other countries and
the city is home to some of the world's largest financial institutions.
Likewise, the United States remains the world's largest national economy
by a substantial margin.

But the world is changing, and quite quickly. The rise of China (and, very likely,
India) is a transformative event for the global economy. Unless something pretty
major goes wrong, we are likely to see much more of this trend for quite a
long time yet.

As recently as 1990, the United States accounted for a quarter of the world economy.
The European Union was just a little over a quarter. Japan, east Asia and India
combined made up roughly another quarter; Japan on its own was about a tenth
of global GDP. (Australia was then, and still is, just over 1 per cent
of global GDP.)

In 2010, the US share was about 20 per cent of world GDP, about the same as
the European Union. By then, Asia was making up just under a third of the total.
China alone had raised its share of global GDP from less than 4 per cent
in 1990 to over 13 per cent – quite a change in the space of
20 years. India's share, which had been the same as China's in
1990, had been little changed until about 2004. It has started to increase
more noticeably since then, though it remains well below China's at the
moment. But given that the demographics for India are more favourable than
those for China, we could expect that in another 20 years India's
prominence will have grown a great deal – assuming that country
continues the process of reform that has helped it to generate impressive growth
over recent years.

These figures are all based on the IMF's Purchasing Power Parity estimates for
countries' respective GDPs. Some might find them a bit abstract –
if you doubt that, try explaining purchasing power parity to your mother. But
we can appeal to various other ‘real’ indicators to chart the rise
of China in particular. The number of people in paid employment in China was
780 million as of 2009. The increase since 1990 was about 130 million,
which is nearly the total number of employed workers in the United States (and
11 times the total number currently employed in Australia).

In that year of 1990, China produced just over 50 million tonnes of steel products.
By 2010, China was producing more than that volume of steel products each month,
and accounted for nearly half of global crude steel production. Virtually all
of this steel is consumed within China, to build new cities and transport infrastructure.
Currently, steel consumption in China is nine times higher than that of
the United States. Electricity generation has tripled in China over the past
decade, overtaking the European Union in 2008 to become the world's second
biggest generator of electricity after the United States. Of course, per capita
usage rates of electricity are still much lower in China but they will rise
with incomes. In 1999, just over 23,000 Chinese postgraduate students were
studying abroad. A decade later, there were 230,000.

All of these metrics tell a similar story: the rise in the importance of the Chinese
economy is extraordinary. Other countries in the Asian region have also shown
solid rates of growth over this period, but the size and pace of change in
the Chinese economy stands out.

There are few countries that have noticed this more in their trading patterns than
Australia. Our trade patterns have been strongly oriented towards Asia since
the emergence of the Japanese trade relationship in the 1960s. But this has
taken a further step up in recent years, with the share of merchandise exports
going to the Asian region rising from a little over 50 per cent as recently
as 2003 to over 70 per cent in
2010.[1]
A similar trend has occurred in imports. China alone has risen from 6 per cent
of exports a decade ago to 25 per cent today. The rise in Australia's
terms of trade – about which I will not give yet
another sermon today – is part of this same picture.

But it is of course not only Australia that has seen this shift in trade patterns.
In fact, many countries are seeing a significant expansion in two-way trade
with China and there are a number for which China is now the most important
partner. Among that group is not only Australia, but also Japan and Korea.
Clearly trade integration has been happening quickly in the Asia-Pacific region.

These forces are also being felt further afield. The US economy has seen a much increased
trade engagement with China. The share of US imports coming from China has
increased from about 3 per cent in 1990 to 19 per cent today. That
is a very large increase, though it appears to offset a decline in the shares
coming from Japan and other east Asian countries: imports from Asia as a whole
make up about the same share of US imports today – about a third –
as they did 20 years ago. Probably what is happening here is that China
has displaced other Asian countries to some extent as a source of finished
products, including by becoming the final point of assembly for many manufactured
items constructed from components sourced all over Asia.

Even more interesting is the fact that the United States sells a higher share of
its exports to China than to any other single nation apart from Canada and
Mexico, its two North American Free Trade Agreement partners.

All these trends will surely continue, for the process of integrating China and India
into the global economy has a good way to run yet. The Chinese Government is
seeking growth of 7 per cent per annum over the coming five years. That
would be a lower outcome than we have seen in the past five years, but is still
very strong by the standards of the advanced countries. Growth at that sort
of pace, on average, would see China's weight in global GDP exceed that
of the euro area within five years and approach that of the United States within
a decade.

Of course, the future will not be that deterministic. The Chinese economy will have
cycles; it will not trace out a path of steady, uninterrupted expansion. China
could not expect to be immune from various other afflictions experienced by
all countries that can occasionally impede economic growth. But by any reckoning,
the emergence of China is a huge historical event. And then there is India.

So the world of production and consumption is changing.

But it must also follow that the world of finance is changing as well. As incomes
rise so there is an accumulation of physical capital (which accommodates further
increases in labour productivity and incomes) funded by saving out of current
income. Moreover, the scale, scope and sophistication of financial activity
increases, which typically sees the size of gross financial claims rise faster
than income.

The fact that Asian countries have traditionally seen quite high rates of private
saving accentuates this trend. China's saving rate, at about 55 per
cent of GDP, is one of the highest recorded and because China has become a
large economy, the extent of that annual flow of saving is now globally very
significant. In absolute terms, according to the available national income
statistics, China is in fact now the world's largest saver. Its gross national
saving, at an estimated US$3.2 trillion, exceeded that of both the United
States and the euro area in
2010.[2]
Its gross investment is also the world's largest – at an estimated
US$2.9 trillion in 2010. The gap between these two figures –
around US$300 billion – is of course China's current account
position. That is the extent to which China, in net terms, exports capital
to the rest of the world.

As you might expect, to deal with this large volume of saving China has some large
banks. As measured by total assets, 12 of the world's 100 largest banks
are Chinese. This is a higher number than for any other single country, including
the United States. Between 2005 and the start of this year, the Shanghai and
Shenzhen stock exchanges grew by over 800 per cent. As measured by the
market capitalisation of listed domestic companies, the Shanghai stock exchange
is still far smaller than the New York stock exchange, but it is now more than
two-thirds the size of the London and Tokyo stock exchanges. In terms of turnover,
the annual value of share trading on the Shanghai stock exchange in 2009 surpassed
that of each of the London and Tokyo
exchanges.[3]

Asian bond markets, and particularly those in China, have also grown in size. Five
years ago, total domestic debt securities outstanding in China were less than
half of those outstanding in countries such as France, Germany and Italy; today
these markets are roughly all comparable in
size.[4]

So it is not just the centre of gravity of economic activity that is shifting to
Asia – the weight of financial assets is also shifting. Now this
is a slower process since the stock of wealth is a result of a long accretion
over time and economies that rapidly become large in production terms may have
a smaller stock of wealth than countries that have been similarly large for
a long time – such as Europe and the United States. So at this point
the advanced industrial countries still account for the lion's share of
global wealth.

Nonetheless, things are moving quickly. Within the remainder of the careers of many
of us here today, we will very likely see a pretty substantial change in relative
positions. It is interesting to contemplate how that world might differ from
the one to which we have been accustomed.

Every morning, Australian financial market participants wake up to the closing moments
of the New York trading day. The rest of the Asian region wakes up shortly
thereafter. Despite the rapid increases in size of the Asian markets, most
of the time it is changes in US or European markets that set the tone for the
Asian trading day.

Every so often, though, an event in Asia prompts global market responses. Surely
this will happen more often in the future. As the Asian region becomes more
integrated economically, with an ever larger Chinese and Indian economic mass
at the core, and as the accretion of Asian financial wealth assumes increasing
global significance, Asia is likely more often to be a source of ‘shocks’
for the global economy and financial system. I am not suggesting that Wall
Street will dance exclusively to Shanghai's tune. The US economy and financial
system will remain very large and internationally important for the foreseeable
future.

The point is that there will be several potential sources of music emanating from
various centres around the world, to which markets everywhere will respond
to some extent. The United States will certainly be one, and so will Europe
(not always an enjoyable tune of late). We will all need to attune our ear
to Asia's rhythms as well.

Sometimes those differing tunes will clash – as they do at present. At
the moment we see a US recovery that is gaining some traction after a lengthy
period of weakness, a subdued experience in Europe overall with intraregional
differences probably at their most extreme since the euro commenced, while
China and India are seeking to slow their expansions in the face of clear evidence
of rising inflation. US banks are well ahead of their European counterparts
in cleaning up their problems, to the extent that the government capital injections
of two years ago are being repaid, while markets are still waiting for more
complete information about the state of balance sheets in Europe and worrying
about the feedback to public sector finances. Asia's banks, meanwhile,
did not have a solvency crisis and have been able to perform their task of
supporting growth. If anything, their problems are more likely to be those
of exuberance. More attention is being paid to the US fiscal position –
and that will probably increase further. In Asia, public finances are generally
strong except in Japan.

These differences were bound to increase the focus on policy differences between
regions, and exchange rate systems in particular. It is not surprising that
we are returning to discussion of the ‘global imbalances’, since
many of the underlying factors behind them have not gone away. Renewed efforts
to find a framework for talking about these issues are now under way.

As others have said, a prerequisite for a solution is a shared understanding of the
problems within an agreed intellectual framework. But finding that combination
is not proving easy. The dialogue needs to occur on multiple issues, to which
countries bring different perspectives. Many of the countries of Asia come,
for example, with a mindset in which the international monetary system is a
device for stability, one of the foundations for strategies to grow economies
and increase wealth. They see flows of capital, and fluctuations in exchange
rates, as potentially disruptive to the real sectors of their economies. This
is in many respects a traditional post-war perspective, when there was a US dollar
standard, when the United States as an economic and financial power was unrivalled
and all other economies and financial systems were truly small. But of course
Asia is no longer small.

Countries like the United States or Australia, on the other hand, have a different
frame of reference. They tend to see the international monetary system as a
device for accommodating shocks and reflecting differences in economic circumstances.
They see price movements and capital flows, generally, as helping resource
allocation. European countries share that perspective as far as flows and exchange
rates between the major regions of the world are concerned, but share Asian
perspectives on the need for stability within their own region. There are good
reasons, in logic and history, for all these perspectives. We need to understand
them, and find an accommodation.

It does not help, in my judgment, that so much of the discussion takes place through
a bi-lateral prism – particularly the US-China current account prism.
Twenty years ago the prism was the US-Japan balance. The issues are multi-lateral,
not bi-lateral. The US trade deficit was pretty widely spread for many years.
It wasn't just with China. Over the past decade, the United States had
a trade deficit with 13 of the 18 other countries in the G-20 (of the five
surplus positions, the largest was with Australia). This bi-lateral focus can
be quite troubling, and not only because it risks over-simplifying problems
and therefore lessening the likelihood of solutions. It can be troubling for
a host of small countries, which worry about the potential for more widespread
effects of solutions that may be attempted. This is why it is so important
that the problems be considered, and resolved, in a multi-lateral setting.
Hence the importance of the international financial institutions, and of fora
like the G-20, in providing the table around which these discussions should
take place.

That of course means that the legitimacy of those institutions, in the eyes of all
their stakeholders, is key. Good progress has been made in improving the governance
of bodies such as the IMF and no doubt more will be done in this area over
the years ahead. The G-20, a body with a broader constituency than the G7,
has taken a more prominent role. This is all good, but will need to be accompanied
by ongoing efforts to reach a shared vision of the role of the institutions
and the system they are supposed to watch over and protect. If we are all still
not talking the same language about the role of the system or the institutions,
then we will not collectively get very far.

So much work needs to be done yet. America – still the world's dominant
single economy and financial power, albeit not as dominant as it was –
is critical to reaching the necessary framework. But so too is Asia –
a fast-growing, high-saving region with increasing financial resources, a much
increased part of the global economy and financial system, and with, therefore,
commensurately increased responsibilities. Australia – a small but
outward-looking country with very substantial ties to both the United States
and Asia – has more than a passing interest in the progress of this
very difficult, but very important, discussion.